Two mainland real estate giants announced plans for as much as RMB 8.8 billion ($1.3 billion) in asset-backed securities in the last two weeks as the mainland’s real estate investment market opens to a financing alternative to traditional bank loans.
The new securities from a mall development affiliate of China Vanke and state-owned Poly Real Estate are part of a wave of financial innovation in the mainland real estate that the government could double in the next three years.
Poly Gets RMB 5B For Rental Projects
Top mainland developer Poly Real Estate Group announced this past Monday that the Shanghai Stock Exchange had given the go-ahead for its offering of asset-backed securities (ABS) based on rental-housing assets. The group will sell the initial tranche of AAA-rated securities to a pool of qualified retail and institutional investors on the exchange, and will roll out further tranches over the next two years, with plans to raise a total of RMB 5 billion.
Poly’s rental housing financing package follows soon after reports that Beijing-based China Young Professional Apartments (CYPA) had won approval to issue RMB 270 million ($40.77 million) worth of securities on the Shenzhen Stock Exchange, backed by rental income from the homes it operates in first-tier cities.
SCPG Securitises Former Blackstone Malls
While mainland authorities have turned to asset-backed securities to support their rental housing priorities, asset securitisation is also being used to support commercial real estate projects.
SCPG Holdings, which was acquired last year from Blackstone for $1.9 billion by a mainland consortium led by China Vanke, has also turned to asset securitisation to help monetise its southern China malls.
SCP launched its first CMBS product on October 20 aiming to raise a total of RMB 3.79 billion ($573 million). The 12-year product will be backed by cash flows from Shenzhen SCP Plaza, a 207,000 square meter shopping centre and office project that opened in 2007 in Shenzhen. The total value of the asset is reported to be RMB 6.05 billion ($914 million),
Managed by China International Capital Corporation (CICC), the new product is listed on the Shenzhen Stock Exchange and includes Priority A, Priority B, and sub-prime CMBS, according to mainland news portal Guandian. SCPG said that more than ten investors have already subscribed to the priority asset-backed securities.
China CMBS Market Could Triple in Two Years
“The demand for CMBS products is growing very quickly, because people want to be exposed to real estate, particularly commercial real estate nowadays,” commented Joe Zhou, head of research for China at global real estate consultancy JLL.
Industry experts who spoke with Mingtiandi predict that China’s CMBS market could double or triple within the next two years. Last year, total new CMBS issuance in China was estimated to be RMB 19 billion (less than $3 billion) – compared to RMB 520 billion ($76 billion) in the US, according to JLL.
“We had a very strong market [for CMBS products] at the beginning of this year, because many of the products were designed or started being marketed last year, and they launched products earlier this year,” [noted Zhou]. “Coming to the middle of this year, we saw some slowdown because of the whole macro policy, deleveraging, trying to control the risk – all of this has slowed down the CMBS. Now we are moving towards the end of the year, so we are seeing some momentum pick up again.”
With China still struggling to establish REITs after several years of wrestling with the legal and financial details of the structure, commercial mortgage-backed securities and other asset-backed securities appear to be the new financing path for the sector.